Archive for June 22, 2009
Bank Regulators Issue FAQS On Identity Theft Red Flag Rules
On June 11, 2009, federal bank regulators, the National Credit Union Administration (NCUA) and the Federal Trade Commission (FTC) issued frequently asked questions (FAQs) to provide financial institutions and creditors with further guidance on the scope and implementation of the Identity Theft Red Flag Rules (Red Flag Rules).
The Red Flags Rules went into effect for financial institutions on November 1, 2008 and will go into effect for non-financial institution creditors on August 1, 2009 (this deadline has been extended twice because many of the entities did not realize they fell under the Red Flag Rules).
Below is a quick summary of the FAQs. A complete copy of the FAQs is available here.
Scope:
- The Red Flag Rules apply to:
- all banks, savings associations and credit unions, regardless of whether they hold a “consumer account”
- all banks, regardless of whether their powers are limited to trust activities
- brokers, dealers, investment advisors, or investment or insurance companies that are “financial institutions” or “creditors” under the Red Flags Rule, including subsidiaries of banks
- corporate credit unions
- credit union service organizations (CUSOs)
- The Red Flag Rules do not apply to foreign branches of U.S. banks.
Definitions:
- The definition of “covered account” has two parts:
(1) “an account that a financial institution or creditor offers or maintains, primarily for personal, family, or household purposes that involves or is designed to permit multiple payments or transactions” and
(2) “any other account that the financial institution or creditor offers or maintains for which there is a reasonably foreseeable risk to customers or to the safety and soundness of the financial institution or creditor from identity theft, including financial, operational, compliance, reputation, or litigation risks.
An account that falls under either part is a “covered account.”
- These types of accounts may be “covered accounts”:
- Business accounts
- Business loans guaranteed by a consumer
- Pre-paid card accounts (especially those that create a continuing relationship)
- Certificate of deposit accounts
- Investment retirement accounts (IRAs)
- Trust accounts
- Accounts established in the U.S. by non-U.S. residents
- Indirect consumer loans (including loans purchased by another financial institution or creditor)
- Leases
Identity Theft Program:
- Financial institutions and creditors may use automated solutions to detect red flags. They are not required to and an automated solution may need to be supplemented by non-automated policies and procedures.
- The Red Flag Rules do not require a specific response for any particular situation, but give examples of responses that may be appropriate.
- The obligation to oversee service provider arrangements includes fraud detection services and services in connection with opening or accessing covered accounts, such as providing an online banking platform, call center services, or debt collection.
- The Red Flag Rules do not require the oversight of service providers through a written contract, although it might be helpful.
Misc:
- The Red Flag Rules do not contain a specific record retention requirement.
- The Red Flag Rules do not require a financial institution or creditor to educate consumers.
- The list of examples of Red Flags in the supplement to the Guidelines is not a comprehensive list of Red Flags, nor must a financial institution or creditor incorporate all of those examples into its Program.
Missouri Bankers Association — Highlights from the Annual Convention
The 119thAnnual Convention of the Missouri Bankers Association concluded on June 19th in Branson, Missouri. The turbulent ride of the twelve months since last year’s convention resulted in a gathering that was anything but . . . conventional. Here are some notable highlights:
- Barry Asmus, a Senior Economist at the National Center for Policy Analysis, batted lead-off, storming the stage to warn of the downfalls of increased government influence on the private sector in general and the banking sector specifically. More than anything, Asmus understood his audience, and his message resonated with the bankers in attendance (even if he was a tad long-winded). We remain, however, skeptical of Asmus’ unstated but palpable desire to abolish government at pretty much every level.
- The investment banking firm, Sandler O’Neil Partners, L.P., discusses current trends in the M&A and capital markets. As one might imagine, acquisitions are significantly down and capital is tough to come by. The investment bankers recommend that banks identify their potential capital hole by running internal “stress tests” similar to those conducted on the 19 largest banks, giving the bank an accurate third party view of their institution. If your bank needs capital, you should consider raising it during the summer or fall, before the rush to raise capital during the fourth quarter by banks healthy enough to repay TARP clogs the capital markets.
- President Obama’s White Paper, titled “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation“, on regulatory reform was released on Wednesday. (Click here for a summary).
- The release of the White Paper coincided with a regulatory panel discussion that included representatives from the FDIC, Federal Reserve, Missouri Division of Finance, OCC and OTS. Some interesting tidbits of the panel discussion include the following:
- The Missouri Division of Finance outlined the CAMEL ratings of Missouri banks. While over 80% of Missouri banks have 1 or 2 composite ratings, 10 Missouri banks have 4 ratings and five have 5 ratings.
- We would guess that at least 50% of the one-hour panel discussion centered on real estate collateral appraisals. Bankers are dubious of their relevance and weary of being hammered on by regulators to obtain updated appraisals, particularly when cash flow projections (of commercial property in particular) are considered by some to be a better evaluation tool. The regulators conceded the questionable utility of appraisals, but, somewhat apologetically, wouldn’t back off their necessity.
- Banks must closely monitor commercial real estate concentrations. This is a strong correlative link between banks that exceed recommended concentration levels (300%) and those with 3, 4 or 5 composite ratings.
- As part of the proposed regulatory reform, the OCC and the OTS would be folded into a single federal regulations called the “National Bank Supervisor.”
- Participations are a good diversifier for bank loan portfolios if used in moderation. Banks must be weary of participations where the primary bank is at risk of failure. If such a bank fails and the borrower has a deposit at the failing bank, the FDIC can offset the deposit against the loan. That offset work in the favor of depositors of the failed bank and the participating bank will be stuck with a receivership claim. In short, participating banks must do their due diligence on lead banks.
The closing remarks of Susan Barrett, the MBA’s new chairwoman, and Art Johnson, the Chairman-Elect of the ABA, seemed to accurately reflect the mood of the week. The Missouri bankers are optimistic about the future, emboldened by their recent success on the special deposit insurance assessment and ready to stay the course. It will be an interesting 2009.
FDIC and ABA Clarify Required Repo Sweep Disclosures
On February 2, 2009 the FDIC issued a final rule that, among other things, requires certain disclosures regarding repo sweep accounts, effective July 1, 2009. The final rule can be found at 12 C.F.R. § 360.8(e).
Required Disclosures
The final rule requires institutions to inform sweep account customers if their swept funds are deposits under 12 U.S.C. 1813(l): (1) within the first sixty days after July 1, 2009 and periodically thereafter, but not less than annually; (2) in all new sweep account contracts; and (3) in all contract renewals. If the accounts are not deposits the institution must also disclose the status of the funds should the institution fail, for example, secured creditor or general creditor status.
Additional Requirements
These disclosures must be consistent with how the institution reports the funds on its Call Reports or Thrift Financial reports. The disclosure requirements do not apply to sweep accounts where: “transfers are within a single account, or a sub-account;… [or involve] only deposit to deposit sweeps,… unless the sweep results in a change in the customer’s insurance coverage.” The final rule does not require any specific language in the disclosures, allowing institutions to draft their own disclosures. Finally, the FDIC listed several examples of the means by which disclosures may be made, including client letters, transaction confirmation statements or account statements.
ABA Request for Guidance
The ABA recently asked the FDIC for guidance on how banks can ensure that repurchase agreements that are tied to sweep accounts are “properly executed,” such that customers possess perfected security interests in the underlying securities. This is significant, because an unperfected security interest would result in funds being treated as deposits and potentially uninsured in the case of a bank failure.
The ABA hosted a May 21 telephone briefing on these issues. It appears, from the telephone briefing and subsequent guidance from the ABA, that the focus of the FDIC regarding “properly executed” repurchase agreements that are tied to sweep accounts is “control.” In particular, this requires (1) identification of specific securities in the daily written confirmations that are required by the Government Securities Act, (2) inclusion of provisions in the repurchase agreement that appoint the bank as the customer’s agent and that give the customer the right in an event of default (such as bank failure) to direct the bank to sell the securities and apply the proceeds to the bank’s obligations under the agreement and (3) removal of any provisions in the repurchase agreement (and in any confirmations) that permit the bank to unilaterally substitute securities.
